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Weekly Market Review - July 26, 2013


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Weekly Market Review - July 26, 2013

  1. 1. International Global equity markets consolidated this week amidst mixed economic and earnings news flow.The MSCI AC World index gained 0.3% helped by select Emerging markets (EM) and a bounce back in technology stocks. Global benchmark treasury bond yields closed slightly higher as economic data out of major developed economies was positive, weakening the case for further or continued stimulus. Sluggish growth data out of China weighed on commodities and the Reuters Jefferies CRB Index closed down 2.22%. In currency markets, the US dollar weakened amidst speculation that Federal Reserve might not undertake stimulus unwind, as economic data remains mixed. An election win for the ruling coalition and rise in inflation helped the Japanese yen gain.The G20 agreed to reform cross-border tax rules and treaties to curb tax evasion by multi-national corporates. • Asia-Pacific: Regional equity markets outperformed global counterparts helped by sharp gains in Greater China and South Korean equities. Markets in China and Hong Kong were boosted by policy support for growth – government unveiled measures that reduce tax burden on small-and-medium enterprises and taxes on exports. China’s HSBC Flash manufacturing PMI fell to 47.7 in July from 48.2 in June mainly due to decline in new orders.The Nikkei declined as the rise in Japanese yen offset gains from positive political news and better economic data. Inflation rose for the fourth month in a row and trade deficit narrowed. The incumbent coalition Liberal Democratic Party won a majority in the Japan’s upper house elections. South Korea’s economy expanded by 1.1% qoq (sa) in Q2 helped by a recovery in private consumption and strong government spending. Central bank of Philippines maintained status quo on rates. • Europe: Key European indices exhibited divergent trends amidst mixed corporate results for the quarter. Euro area flash composite PMI inched back above the key 50 level reinforcing hopes the region’s economy is on the path to recovery. French INSEE consumer confidence index and German IFO business climate index also showed improvement. Preliminary estimates of UK’s economy showed the country’s economy grew by 0.6%qoq. A new government took office in Portugal bringing an end to political uncertainty. Hungary lowered benchmark policy rate by 25bps to 4.00%, while the Turkey raised the upper end of the short-term interest rate corridor by 75bps to 7.25%. On the corporate front,Telefonica said it is in talks to buy KPN’s German unit for €5 bln andVivendi announced sale of its stake in Activision Blizzard. • Americas: US equity indices were range-bound as select corporate earnings disappointed while economic data was largely positive. Nasdaq index fared better on the back of a rebound in tech stock prices. Weakness in commodity prices weighed on Canadian stocks. The US preliminary ISM manufacturing index rose from 51.9 in June to 53.2 in July and sale of new houses picked up 8.3%mom in June. US consumer confidence moved up to multi-year highs and durable goods order index was bolstered by demand for aircrafts.Elsewhere in the region,Canada reported solid increase in domestic retail sales and Mexico central bank left rates unchanged. On the M&A front, Michael Dell and Silver Lake Partners raised their offer by 10 cents to $13.75/share andYahoo said it will buyback majority of the shares held by hedge fund Third Point for $1.2 bln. Market Review WEEK ENDED JULY 26, 2013
  2. 2. Weekly Weekly change (%) change (%) MSCI AC World Index 0.29 Xetra DAX -1.04 FTSE Eurotop 100 -0.33 CAC 40 1.11 MSCI AC Asia Pacific 0.39 FTSE 100 -1.14 Dow Jones 0.10 Hang Seng 2.84 Nasdaq 0.71 Nikkei -3.15 S&P 500 -0.03 KOSPI 2.11 India - Equity Concerns about the impact of the latest RBI measures along with FII outflows led Indian markets lower this week, even as most EM indices registered gains. Mid and small caps underperformed large caps. Capital goods, metal and banking stocks lost ground, while IT stocks gained on hopes the rupee depreciation and stronger growth trends in developed economies will boost earnings. On the corporate front,TCS acquired French company Alti for Rs. 530 crore. • Macro/Policy: The government conferred additional powers on SEBI to enable better market oversight and enforcement.Telecom Regulatory Authority of India kicked off a consultation process for spectrum auction process and pricing. This is a positive change from the previous stand and a similar pragmatic approach to policy could ease some of the issues facing the telecom industry. Policy makers remained focused on tackling current account and rupee related issues – this week the RBI removed the earlier financial restrictions placed on importing gold against credit and instead mandated that entities (including banks) importing gold utilize at least one fifth of the consignment for export purposes. India’s gold, gems & jewelry exports amounted to about 12% of total gold imports in FY13. With the RBI mandating an increase to 20%, there could be a supply shortfall in domestic markets or fall in imports. RBI’s latest measures to tighten systemic liquidity as part of its efforts to support the rupee will weigh on growth if maintained for an extended period of time.The growth concerns are reflected in the economic growth downgrades for India. This is happening amidst similar slowdown in most Emerging Market economies – Asia along with China are witnessing continued moderation and many countries are looking to defend their currencies. A combination of factors including re-balancing, fall in savings rate, strong dollar and rising real rates have contributed to the slowdown across regional economies. As we have shared earlier, notwithstanding the near term risks in terms of the strong dollar and growth uncertainty in these countries, the medium to long term prospects remain positive mainly due to the strong fundamentals. Whilst growth rates could slow down further, they remain well ahead of other EM countries and especially the developed world. Weekly change (%) S&P BSE Sensex -1.99 CNX Nifty -2.37 CNX 500 -2.71 CNX Midcap -3.88 S&P BSE Smallcap -3.33
  3. 3. India - Debt Bond markets extended declines as fresh RBI measures tightened systemic liquidity further and raised concerns about monetary policy direction going forward. • Yield Movements: RBI announcement sparked a sharp surge in yields at the shorter end of the curve and caused the yield curve to invert further.Yields on the 1- and 5-year papers jumped 112 bps and 34 bps respectively, while those on the 10-year paper increased 22 bps to 8.13%.Yields on the 5-year AAA corporate bonds also rose by a similar quantum. CP/CD rates Source: Bloomberg, CLSA • Liquidity/borrowings: Overnight call money rates surged to close at near 10%, reflecting the impact from the liquidity tightening.Apart from the changes to LAF/CRR balance management, the central bank drained liquidity to the tune of Rs. 6000 crores through auction of cash management bills. • Forex: Fresh measures from the central bank and dollar weakness helped the currency extend gains and close up 0.52% against the greenback.As of Jul 19, 2013, India’s forex reserves stood at $279 bln, about $1 bln less than previous week levels. • Macro/Policy: The RBI announced further policy changes to reduce rupee liquidity.The measures need to be seen in the context of the limited impact last week’s policy changes had on the rupee and systemic liquidity. As per new measures • Banks can borrow up to 0.5% of their net demand and time liabilities (NDTL), as against 1% earlier. The measure is expected to reduce borrowing under LAF to about Rs. 37,500 crs from Rs. 75,000 crs earlier. • Banks need to maintain a minimum daily balance of 99% of the cash reserve requirement, as opposed to the earlier system of maintaining 70% of the required CRR on a daily basis The RBI is set to hold the Q1 review of monetary policy mid-next week. Next steps would depend on the effectiveness of above measures to reduce INR volatility. Measures aside, markets will keenly watch the central bank’s policy tone/language to gain an insight into the length of time these measures will stay in place and its reading of other macro-economic data.
  4. 4. 26.07.2013 19.07.2013 Exchange rate (Rs./$) 59.04 59.35 Average repos (Rs. Cr) 37,052 103,114 1-yr gilt yield (%) 9.84 8.63 5-yr gilt yield (%) 8.63 8.29 10-yr gilt yield (%) 8.35 8.13 Source: Reuters, CCIL. The information contained in this commentary is not a complete presentation of every material fact regarding any industry,security or the fund and is neither an offer for units nor an invitation to invest.This communication is meant for use by the recipient and not for circulation/reproduction without prior approval.The views expressed by the portfolio managers are based on current market conditions and information available to them and do not constitute investment advice. Risk Factors: All investments in mutual funds and securities are subject to market risks and the NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market.The past performance of the mutual funds managed by the Franklin Templeton Group and its affiliates is not necessarily indicative of future performance of the schemes. Please refer to the Scheme Information Document carefully before investing. Statutory Details: Franklin Templeton Mutual Fund in India has been set up as a trust by Templeton International Inc. (liability restricted to the seed corpus of Rs.1 lac) with Franklin Templeton Trustee Services Pvt. Ltd. as the trustee (Trustee under the Indian Trust Act 1882) and with Franklin Templeton Asset Management (India) Pvt. Ltd. as the Investment Manager. Copyright © 2012 Franklin Templeton Investments.All rights reserved